These days we have seen a shift from regular investing to ESG investing. Explore if ESG investing is a solid investment strategy.
Over the years, there has been a noticeable shift in the investment habits of individuals. Previously hesitant investors are now more willing to invest due to their increased understanding of the importance of investing. Additionally, how investors choose to invest has also transformed. In the past, individuals would analyse a company’s ratios, bottom line, and the industry in which it operated. However, things have changed.
Today, there is a growing awareness of the importance of protecting the environment and making it a better place for future generations.
The days when people used to plant trees in the name of sustainability are long gone. Instead, investors are taking a highly proactive approach by considering a company’s efforts to protect the environment, promote corporate governance, and contribute to society. This approach is referred to as Environmental, Social, and Governance (ESG) investing, which promotes socially responsible, impactful, and sustainable investing.
Green investing is familiar to us. You would be surprised to know that you can even do a green FD if you are a risk-averse investor, and the bank will ensure that while giving loans, your money will be given to sustainable projects only.
Similarly, there are ESG Funds and a Nifty100 ESG Index, which comprises ESG-friendly companies. It tracks the performance of companies with sustainable initiatives.
If we talk about mutual funds, India currently has 10 ESG funds, and the US and UK have over 500 each, so there is still a long way to go. The trend of sustainable investing has started, and people are hopping on to it.
But the question remains – what is ESG investing, and is it a solid investment strategy to opt for?
Let’s find out.
What is ESG Investing?
ESG investing approach focuses on investing in companies that have inculcated responsible social behaviour and positively impact the environment, society, and corporate governance.
Just as our spending preferences have changed, like vegan menus in mainstream restaurants, eco-friendly fashion brands, and carbon offset options for flights, similarly, investors are shifting from traditional investing to ESG investing.
People want to ensure their investments align with their values and contribute towards creating a better place to live.
What are Environmental, Social, and Governance?
The environmental factor focuses on companies minimising environmental impact by managing pollution, waste, and greenhouse gas emissions.
Social issues also play a significant role in investments, as investors seek to support companies that treat their employees and society fairly.
Governance risk, the third factor, looks at how a company is run, including board structure, stakeholder rights, and executive remuneration.
Benefits of ESG Investing
Long-Term Focus: ESG investing motivates companies to think beyond just generating profits and work on a long-term aim. By focusing on ESG factors, companies consider the long-term sustainability of their operations instead of just short-term profits. This can provide investors stability as the company has a long-term goal.
In simple terms, ESG investing encourages companies to think ahead and make good decisions for both the planet and investors.
As an ESG-focused investor, you would surely research the company’s sustainable business. While doing so, you can gain insights into the company’s operations, risks, and potential opportunities. This knowledge can help investors make more informed investment decisions and reduce the risk of investing in poor-quality stocks.
Positive Impact on Society and the Environment: Investors can positively impact society and the environment by choosing to invest in companies that prioritise ESG factors. This can include supporting companies that promote renewable energy, sustainable agriculture, and responsible labour practices, among other things.
Some investors see ESG investing as more than just a financial opportunity. These factors have moral value for them and help determine their investment decisions. For instance, investing in a tobacco or liquor manufacturing company may be unacceptable for an ESG investor even though others think it is profitable.
Is ESG a Solid Investment Strategy?
ESG investing can be a good strategy if you research the company thoroughly. This includes not only looking at the ESG factors but also the financials of the company. Apart from analysing the balance sheet, you can read and analyse the company’s annual and Corporate Social Responsibility (CSR) reports. This will give you a better understanding of the company’s ESG initiatives.
*The article is for information only. This is not investment advice.
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